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Franchisors planning to expand to China need to do their homework on the unique regulatory challenges they will confront, including the 2+1 requirement and a range of other legal obligations.
China’s 2+1 requirement stipulates that franchisors intending to offer franchises in China must have first owned and operated two units under that franchise brand for at least one year somewhere in the world.
As a general rule, the two units being owned by the parent company of the franchisor or other affiliates will satisfy the 2+1 requirement, as long as a majority equity interest is maintained down the company chain.
The 2+1 requirement is just one of the unique challenges presented by the complex legal framework for franchising in China. These legal obligations were outlined in a special presentation by the Beijing office of global law firm DLA Piper during our recent franchise delegation to China.
Trademark registration is another regulatory requirement that can present an obstacle for prospective franchisors in China, according to DLA Piper. Franchisors must have at least one registration certificate issued by China for trademark rights, patent rights or other business operation resources related to franchise activities. While not a specific pre-sales requirement, it needs to be planned at least one year before officially entering the market.
The 2+1 requirement plus trademark registration are two of the key components of China’s franchise regulations that require franchisors seeking to enter the market to demonstrate that they have a mature business model and the capability of providing continuing services to franchisees, including operational instructions, technical support and business training.
Under China’s franchise regulations, franchisors must also provide pre-contractual disclosure documents to franchisees at least 30 days before a franchise agreement is signed including items such as: information on the franchisor, its franchise resources and support, franchise fees, actual investment amount, average sales volume, costs, gross and net profit and audited financial statements.
The franchise agreement must then contain further specific detail on the duration of the franchise, the payment of franchise fees, guidance, technical support, training and other services, promotion and advertising, dispute resolution, termination and cooling-off period.
There is also an initial franchise filing requirement whereby within 15 days of signing its first franchise agreement in China, a franchisor must file as a franchisor with the Ministry of Commerce. There are also ongoing obligations for franchisors in terms of material changes to disclosed information and annual and updated filing requirements.
In summary, DLA Piper’s key legal steps for new franchisors in China to take are:
- Review 2+1 status
- Attend to trademark registrations
- Find the right franchisee and negotiate
- Provide disclosure document to the franchisee
- Sign the franchise agreement
- Franchise filing
- On-going disclosure obligations
| See the DLA Piper presentation here » |
Kerry Miles is the General and Business Manager for the Franchise Centre at Griffith University and has over 15 years of experience in the franchise sector. She is responsible for developing franchise educational products and events and is the editor of the Centre’s enewsletter.
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